The Biggest Myth of Technology Licensing

In the previous article I mentioned the reasons for licensing the technology. But still one question remains unanswered: if you license technology for financial reasons – to earn money – is it worth it? Or, stated more typically,

Yes, it is good to make extra money, but by licensing our technology, aren’t we just creating or empowering our competitors, who would now directly compete with our own products, and therefore damage our profits?

And the answer is: this is rarely the case.

Before explaining the details, please let me explain something the business people knows well, but the engineers might not: the technology licensing agreement are always restricted. Those restrictions are a way to strive a balance between being able to use your technology yourself, and offering the licensee something still useful for them. For example, the common restrictions are:

The overall term of the licensing agreement, which is almost never perpetual when the technology is licensed at cost;

Markets (“no sales to enterprises”), territory (“no sales in North America”), or industry (“can only sell to utility and agriculture customers”) restrictions;

Pricing restrictions (“product should be offered for no less than $39.99”) or other similar restrictions, ensuring the competitor can’t undercut on pricing;

Granted rights restriction – for example, most agreements prohibit technology sublicensing or any kind of analysis (including the legal means) to create a competitive technology;

This list could be much longer – the point is that there are ways to restrict the use of the technology in a way which would lower the impact of licensed technology on your business.

But “lower impact” is different from “no impact” – and if we do not license it at all, there would be no impact on our business at all, right?

Unfortunately, there still would be impact.

If the technology is truly unique, and there are no competitors, then it is true that if you do not share it with anyone, then today there would be no market impact. But only today. If the market for this particular technology is lucrative enough, tomorrow the competition will catch up. In a market economy more companies will join and develop competing technologies. Being second, they would learn from your mistakes and would make it faster, with lesser effort and likely better. There is also risk that the newly developed technology would be so superior to yours that it would quickly make your technology completely obsolete, as was Polaroid technology made obsolete by digital cameras and portable inkjet printers!

This is why even when you do have unique technology which is hard to recreate – which honestly doesn’t happen that often – you still should consider licensing it. This would put less incentive on other companies looking at that market to develop their own technologies, and thus compete with you. And by licensing the technology, you could enforce the terms on its use, such as those above – and this is not possible when the company develops their own technology.

Of course, if the technology is not unique, you cannot prevent or reduce competition by simply refusing to license your technology to a licensee who could be competing with you. What will happen in this case is that one of your competitors will offer to license their technology. So now what would be the result?

The licensee would still get the technology, and would still compete with you. Your efforts to prevent this competition failed;

The licensee would not have to abide to any of restrictions you would otherwise impose on them (such as markets/pricing/territory), only to the restrictions imposed by your competitor…

… and your competitor’s restrictions might be very different from yours. In fact, a competitor might impose specific restrictions to ensure the licensee takes customers right from you!

Your competitor gets compensated for the license, and uses those money to develop a better technology, market the product or grow the company, increasing its competitive advantage over you.

Your competitor gets other intangible benefits (such as bigger exposure for the technology, benefiting from a larger userbase in terms of bug reports and improvement suggestions).

And since you refused to license, thus reducing the competition, your competitor will get a better deal for their technology than it would if you were on a market!

While this describes “the worst scenario” and might not always happen, the main idea here is that by refusing to license your technology, you are typically only getting a short-term market advantage. Unless you are strong in other areas (such as brand recognition, market access or exposure), the advantage you are getting might not be valuable enough.

Is there a way out?

So, if not licensing the technology is bad for the reasons stated above, but there are genuine concerns against licensing the technology, is it possible to address this somehow?

Yes.

One of possible ways some companies address this situation is by licensing a more limited version of their technology. While a limited version typically does not performs not as good as the company’s original technology, it typically still performs good enough for the market. This is especially true if the technical limitation result in other changes which are perceived as positive by the users. For example, a worse quality of video encoding may result in faster encoding or lower resource usage (thus allowing to build cheaper devices). While many engineers frown upon such modifications, and some consider it borderline cheating to “dumb down” the technology, to their surprise the market often gladly accepts it.

The truth is that the market needs are different for each customer. Not all of them need the superior technology. As an engineer, you know it yourself – you do not purchase the most powerful cell phone and the best camera. You carefully choose your needs and try to find the best product matching your needs. It might not be the best product, but it would be cheaper, it might have better design, a better battery life or something else which is important for you. The companies licensing the technology think the same way.

Let’s see some possible technical limitations, and the technical reasons why some licensees might actually prefer them (of course there may be some other reasons such as financial):

Technology licensed could be a previous version, and not the latest version, which the company uses in its own products.

This way the licensees trade off new cool features and enhancements for stability, as the previous version is more stable. Previous version is also more likely to better work on older hardware and older operating systems.

Technology licensed is a trimmed-down version of the full technology used in the company products; this could mean using less passes for video encoding or OCR, or less thoughtful detection.

This would lead to faster processing and lower resource usage. Less thoughtful detection would also result in less false positives.

A company uses multiple technologies in its product which work in synergy, but only makes available several of them and not all.

Less code overall leads to smaller resource consumption and better performance. Also a licensee might obtain missing technologies from other vendors, and by combining them get a product which performs better than the company’s original product.

There are more possibilities, but hopefully you see the idea. It is completely ethical to license a trimmed-down technology, assuming of course the company discloses this fact. Smart companies go even further and offer both the full-blown and the trimmed-down version of their technology in their portfolio, to address the needs of the licensees who are be willing to trade off top functionality for something else, be in pricing, resources or speed.

Of course there are limitations too. If the licensed technology is so inferior that it doesn’t serve the market needs, the market won’t accept it, and offering such technology would rather do disservice to a company.